The March employment and wage numbers reported last Friday confirm that the U.S. economy is slowing and inflation is coming down. Markets believe the Fed is nearing the end of its interest rate increases and will be cutting interest rates later in 2023.
- The 236,000 gains in non-farm payrolls in March is the weakest since December 2020, with job openings dropping below 10 million and an upward trend in jobless claims signaling lower labor demand.
- Because the household measure of employment rose by more than the labor force, the unemployment rate dropped back to 3.5% in March from 3.6% the prior month.
- The annual rate of average hourly earnings rose by 4.2%, nearly a two-year low, and the 3-month over 3-month annualized rate of wage growth fell to 3.8%.
Outsized money growth in 2020-2021, which contributed to the inflation crises of the past 18 months, has turned negative as savers have shifted out of bank deposits and into money market funds and bonds which offer significantly higher returns.
- For the first time in the past 60 years, the M2 measure of money has fallen significantly below zero over the past three months. While the banking crisis a month ago played a small part, higher interest rates have been drawing funds out of low-return liquid deposits that make up the M1 and M2 measures of money supply.
- Small- and mid-tier U.S. banks have been supporting continued lending with their declining cash holdings and increased borrowing and soon will have to limit new lending and shrink loan portfolios, thereby putting additional downward pressure on economic growth.
This week will bring important economic news on growth and inflation.
- Reporting on Wednesday, March CPI year over year is expected to show headline inflation declining from 6% to 5.4%, but core inflation remaining at 5.5% or rising slightly depending on whether housing costs are yet picking up declining rental rates.
- Friday reports on retail sales are expected to show a sharp drop in March over February, and manufacturing is expected to show a slight decline.
- FOMC March meeting minutes are also due out on Wednesday and will provide insight into the Fed’s thinking of the mid-March bank failures impact on tightening credit markets.
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